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Better Watch Out: Deep Negative Interest Rates

Updated: Mar 18, 2020

History repeats?

I was never a great fan of history but when it comes to money, it seems quite a lot can be learned from the past.

Money itself isn’t studied in schools, let alone the narrow sub-section of monetary history, astonishing given that we spend most of our lives working for it. What we take as given about how money works is based on such a short period of time, often our own lifetimes. Yet even a cursory glance back over the last 100 years would be enough to make us balk.

We are currently living through a worldwide financial experiment that ultimately began in 1971 and to put it mildly, things aren’t going too well. It isn’t all that surprising either, since over the past thousand years smaller versions of the same experiment have been repeatedly tried and all ended the same way, badly.

The experiment? Fiat money.

The fiat money experiment has never worked because each and every time a currency is debased, its value is destroyed and it leaves those holding it with nothing but worthless pieces of paper.

A recent working paper from International Monetary Fund, Enabling Deep Negative Interest Rates to Fight Recission: A Guide, discusses how Central Banks can enforce negative interest rates on society most effectively. Whilst we currently only see them in certain country’s and at an institutional level, it is pretty clear from reading it that negative interest rates are coming to the high street banks and they are after your savings.

Negative interest rates wouldn’t be possible in any traditional form of asset-backed money, it is only through the use of fiat money that Central Banks can wield such powerful tools.

This is really important because what it means is that we are at its mercy. The Central Banks could implement negative rates (imagine -5% or even -10%) and essentially force us to spend our savings. Once the zero interest rate bound is broken, the world has changed and we need to be prepared. Money as we know it today will no longer be a store of value. Get paid in it? Sure. Buy your groceries? No problem. Save it for a rainy day? At your peril!

Now this is where Monetary History becomes useful. From the past we can gleen that there are other ways to save and that this cloud does have a silver lining. In fact, for most of time there have been and still remain alternative stores of value, we have simply become so accustomed to using the banks as our means of savings that we have forgotten they exist.

Any asset without a counter-party, something that you can own outright, can be used to store value such as; Gold, Silver and even Cryptocurrency. They certainly aren’t as convenient as saving in the bank but when the banks begin eating away at your savings with negative rates, you may find these options suddenly become quite appealing.

Back to the old it seems, save silver, gold or cryptocurrency and buy a house when you can afford it. It won’t look quite the same as the past but it will rhyme. No doubt we will still use the banks for day to day spending but when it comes to storing our wealth, you will be better off doing so elsewhere.

The implementation of Negative Rates will take most of us time to really get to grips with, the concept just seems contrary to everything we know about money. But desperate times call for desperate measures and for the Central Banks these are the most of desperate of times.

The current fiat system is in peril and the savings of the nation are about to be looted to try and support it. Should the fiat system fail, it will spell the end of the Central Banks themselves and they will do whatever it takes to ensure their survival.

Everything we know and understand about money today is changing. Understanding what is happening and why, is critical to our future selves ability to protect our wealth from being destroyed. We place so much of our trust in a system that does not always have our best interests at heart. It pays to know what is headed our way.

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"It is well enough that people of the nation do not understand our banking and Monetary system, for if they did, I believe there would be a revolution before tomorrow morning"

Henry Ford

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